22nd of November 2008
 
T THURSDAY 14TH AUGUST

Good Morning,

The recent decline in Sterling sentiment continued, and quickly yesterday as the UK currency fell to a fresh low against the Dollar, falling to below1.8650 following the release of the Bank of England’s quarterly inflation report. The Pound also recorded heavy losses against all of the 16-most actively traded currencies after the Central Bank cut its forecast for UK economic growth and unemployment rose by the most in almost 16-years. Claims for jobless benefits increased by 20,100 in July to 864,700, and the report illustrated the impact of the credit crisis on the labour market, as rising unemployment will curtail consumer spending but exacerbate the worst housing slowdown in 18-years. The effect on the UAE Dirham with both a stronger Dollar and a weaker Sterling, saw the exchange rate move lower from 7.00 on Monday to 6.84, following highs of 7.37 last month.

The Governor of the BoE, Mervyn King also said that the annual pace of inflation, which currently stands at a decade high of 4.5%will possibly reach 5% before falling back to the government’s 2.0% target in two years as long as policy makers keep interest rates steady at 5.0%. Nevertheless, Sterling declined significantly following the report, falling to 1.2530 against the Euro, as traders largely ignored King’s comments and focused on the downward revisions to economic growth. The UK economy is forecasted to grow roughly 0.1% on a year-on-year basis in the first quarter of 2009 and that’s compared with a previous estimate of 1.0% and King conceded that “broadly flat output means there is a possibility of a quarter or two of negative growth” which would signal a recession. Traders were however, speculating on the timing of an interest rate reduction as the economy spirals towards contraction.

The Euro again took advantage of Sterling ’s weakness yesterday but has been unable to make any gains against the Dollar, trading below 1.49, after European industrial production remained unchanged in June after by the most in 16-years last month. Manufacturing in the in the Euro-zone fell 0.5% from this stage in 2007 as the region’s economy stutters to the worst performance since the introduction of the Euro in 1999 and the report is just the latest indication that growth will slip into negative territory.  Nevertheless, the European Central Bank have maintained a hawkish stance on inflation and policy makers have frequently highlighted the inherent risks to price stability, which means that the governing council will probably hold interest rates at the highest level in seven years, at least for the time being.  The focus today will fall on the harmonised index of European CPI and the report is expected to confirm that inflation edged higher to 4.1% in the final estimate for July but the Euro may struggle with growth expected to slip to 1.5% in the second quarter.

The renewed optimism surrounding Dollar continued as the U.S currency made further gains against all the majors yesterday despite the slight increase in crude oil prices and reports that U.S retail sales declined for the first time in five months

Michael Ince


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